Author: cvernon

How Will the 2020 Election Affect the Markets?

The 2020 presidential election is fast approaching on November 3rd and key election issues pertaining to the economy will be viewed with respect to a backdrop of crisis and uncertainty more than ever. Curbing the spread of COVID-19 is at odds with reopening the economy while racial injustice remains a focal point. A potential Biden presidency and Democrat-controlled Senate could result in tax increases aimed at stimulating the economy through public projects and providing a social safety net. In contrast, a second term with Trump would likely mean more of the status quo in terms of keeping the 2017 tax cuts, further trade negotiations with China, and his attempt to nullify Obama’s Affordable Care Act.

In this newsletter, we assess the platforms of both Biden and Trump with a focus on Biden’s proposed tax policies and a perspective on how they are expected to affect the economy and markets. We next examine the historical effect of politics on the markets such as equity performance based on which party controls the White House, Senate, and House of Representatives. Lastly, we take a look at 2020 election expectations based on recent polls and markets.

Read > How Will the 2020 Election Affect the Markets?

 

The opinions expressed herein are those of Marquette Associates, Inc. (“Marquette”), and are subject to change without notice. This material is not financial advice or an offer to purchase or sell any product. Marquette reserves the right to modify its current investment strategies and techniques based on changing market dynamics or client needs.

Resilience in U.S. States, Cities, Health Systems, and Universities: Municipal Asset Class Review & Outlook

To date during this COVID-19 pandemic, both U.S. municipal bond issuers as well as municipal bond strategies have proven to be resilient despite the mounting adversity brought on by the nationwide lockdowns and other social distancing guidelines. The broader market recovery has been relatively quick as the S&P 500 is now back to pre-COVID highs, corporate credit spreads are back to pre-COVID tights, and overall volatility has mostly stabilized. The rebound in the economy is proving to be slow, however — with recent signs of leveling off — and is not expected to fully rebound until a vaccine is approved and distributed.

In the following, we provide a quick review of how municipal bonds have weathered the crisis so far in 2020; an assessment of key valuation, fundamental, and technical indicators to formulate a thesis for investing in municipal bonds going forward; and perspectives on how specific segments of the asset class such as investment grade municipals vs. high yield municipals and select sectors of the municipal bond market such as healthcare and education are expected to fare during the balance of the recession and recovery.

Read > Resilience in U.S. States, Cities, Health Systems, and Universities: Municipal Asset Class Review & Outlook

 

The opinions expressed herein are those of Marquette Associates, Inc. (“Marquette”), and are subject to change without notice. This material is not financial advice or an offer to purchase or sell any product. Marquette reserves the right to modify its current investment strategies and techniques based on changing market dynamics or client needs.

A Key Rebalancing Consideration: Drawdowns

In times of market turbulence, investments may sustain peak-to-trough declines known as drawdowns. The COVID-induced drawdown in March was no exception. Our chart this week illustrates the drawdown history for core bonds, bank loans, high yield bonds, and hard currency sovereign emerging markets debt (“EMD”) compared with the S&P 500. While past performance is not indicative of future returns, historical drawdown risk associated with past market volatility is a helpful metric to consider in the recovery from the current global health pandemic. As evident in the chart, each of the fixed income plus sectors¹ is correlated with the S&P 500, but the magnitude of plus sector drawdown risk is much less than the magnitude of equity drawdown risk — with one notable exception. In the 1990s EMD exhibited larger drawdowns than equity. At that time, EMD was very thinly traded, less mature, and more susceptible to dramatic swings.

While rebalancing from equity to fixed income plus sectors increases credit risk and introduces some drawdown risk, the magnitude of that drawdown risk from plus sectors is expected to be less than the expected drawdown risk from equity. As such, in this low Treasury yield environment, we recommend that investors consider both fixed income plus sectors and equity as ways to achieve greater total return potential and yield in portfolios. A diversified portfolio that takes advantage of the lower correlations between bank loans, high yield, EMD, and equities may benefit from greater efficiency and a higher Sharpe ratio in addition to the lower-magnitude drawdown risk from plus sectors.

Print PDF > A Key Rebalancing Consideration: Drawdowns

¹Bank loans, high yield bonds, and emerging markets debt.

 

The opinions expressed herein are those of Marquette Associates, Inc. (“Marquette”), and are subject to change without notice. This material is not financial advice or an offer to purchase or sell any product. Marquette reserves the right to modify its current investment strategies and techniques based on changing market dynamics or client needs.

Is Now a Good Time for Equity Long/Short Strategies?

The investment landscape looks different post-COVID. Real interest rates have fallen into negative territory. The outlook for investment portfolios built on a fixed income allocation has meaningfully changed. The stock market is just off of new highs, increasingly disconnected from the underlying economy. Are equities unstoppable, or set up for a massive correction on any negative vaccine news or a pullback in stimulus? And how will the November election impact portfolios?

Clearly, there are many moving pieces for asset allocators trying to balance risk and return. Given the current environment, part of the solution may be an allocation to equity long/short hedge funds. Equity long/short strategies can improve portfolio diversification, help protect capital in periods of market weakness or heightened volatility, and increase overall risk-adjusted returns. In August, Hedge Fund Research noted that institutional investors were actively looking to increase exposure to hedge funds in the second half of the year as a direct result of the volatility of the first half. In this newsletter, we outline a few reasons why.

Read > Is Now a Good Time for Equity Long/Short Strategies?

 

The opinions expressed herein are those of Marquette Associates, Inc. (“Marquette”), and are subject to change without notice. This material is not financial advice or an offer to purchase or sell any product. Marquette reserves the right to modify its current investment strategies and techniques based on changing market dynamics or client needs.

Do Presidents Play a Role in Equity Performance?

With market volatility already heightened due to the COVID-19 pandemic, the U.S. presidential election this year poses another layer of uncertainty that investors may view as added risk to their portfolios. In particular, there is inevitable speculation about how the market will react upon which candidate or political party wins the election. This week’s chart illustrates equity performance over the last nine presidents since 1969.

The question most asked is how the stock market will perform under Republican or Democratic leadership in the White House. Based on the data above,¹ the equity markets have averaged 14% annualized total returns when the president has been a Democrat and 8% when a Republican has been president. However, we caution that equity markets are subject to many market forces and most importantly, the sample size from this data set is not large enough to support these trends in a statistically significant manner. The good news is that regardless of political party, the stock market has averaged 10% a year over the time period shown in the chart.

As we look towards the November election, it is critical to understand the platforms of each candidate and how they can broadly impact the economy and by extension, equity markets. Understanding each candidate’s position on a variety of economic and social issues will inform the market’s likely reaction to the election results and help formulate expectations for investors. In the coming weeks, we will release a paper that examines these very topics in greater depth to establish baseline expectations of each candidate’s policies, market impact, and historical market performance of political party leadership in Washington across the White House, Senate, and House of Representatives. If nothing else, we know the election will be contentious and scrutinized, with market participants closely watching the ultimate result.

Print PDF > Do Presidents Play a Role in Equity Performance?

¹ For measuring equity performance, a total return index was used to account for shares that pay dividends and represent more accurate performance by reinvesting dividends back into the index.

 

The opinions expressed herein are those of Marquette Associates, Inc. (“Marquette”), and are subject to change without notice. This material is not financial advice or an offer to purchase or sell any product. Marquette reserves the right to modify its current investment strategies and techniques based on changing market dynamics or client needs.

We’ve Come So Far, but Maybe It Was Too Fast

It had been smooth sailing in equity markets since the first quarter’s bear market. The S&P 500 index eclipsed the February 19th all-time high and in August the volatility index grazed lows not seen since the beginning of the year. However, over the past week, equity markets have been in turmoil with the S&P 500 falling nearly 7.0% and the NASDAQ 100 falling into correction territory, declining 10.9% in the last three trading days.¹ The turmoil has been concentrated in the most unlikely place: growth stocks.

In this newsletter, we provide a recap of recent volatility in the U.S. equity markets and assess the sources of ongoing investor uncertainty.

Read > We’ve Come So Far, but Maybe It Was Too Fast

 

The opinions expressed herein are those of Marquette Associates, Inc. (“Marquette”), and are subject to change without notice. This material is not financial advice or an offer to purchase or sell any product. Marquette reserves the right to modify its current investment strategies and techniques based on changing market dynamics or client needs.

And the Beat Goes On…

This week, the S&P 500 index closed at 3,389.78, setting its first record high since previously peaking on February 19th, 2020; it is up 4.9% year to date. This post-bear market recovery is officially the fastest ever. For the sake of comparison, it took more than three years for the S&P 500 to reclaim its peak after the Global Financial Crisis. However, the S&P 500 was not the first broad market index to reclaim its high in 2020. The NASDAQ 100 index surpassed its previous peak more than two months ago on June 5th and is up 30.5% year to date. On the other hand, the Dow Jones Industrials Average (DJIA) is still more than 5% off its record high and negative for the year.

How is it that each of these indices is considered to represent the broad domestic equity market, but they have such wide performance differences? The main reason is the calculation and composition of the indices. Let us begin with the Dow, the oldest index out of the three indices. Founded in 1896, the Dow is comprised of 30 stocks that are selected by their size and influence on American business (with the latter clearly being subjective). In addition, the DJIA is a price-weighted index which means that the companies with the highest share price have the highest weighting in the index. For instance, Apple, which trades at $462 a share¹ is the largest constituent in the DJIA with an 11.4% weight. The next largest constituent is UnitedHealth Group, which trades at $316 a share² and has a 7.8% weight in the DJIA. As a result, large price increases or declines in these stocks will have an outsized effect on the returns of the index. Consequently, the price decline in Boeing, a top 10 Dow constituent, due to delays in the Max 8 and lower demand from the COVID-19 pandemic has had a large impact on the Dow’s year-to-date return.

The S&P 500 and NASDAQ 100 indices are market capitalization-weighted indices. This means that the weightings of their constituents are based on the product of the stock price and the outstanding shares. As a result, stocks with high prices and the largest number of shares outstanding will have the greatest impact on the index’s return. In the case of the S&P 500, which tracks the largest 500 companies in America, this means that Apple, Microsoft, Amazon, Google, and Facebook are the largest constituents in the index. As discussed in my previous post, “There’s FAAMG and Everyone Else,” investor enthusiasm has propelled these stocks to new highs even though most of the companies in the S&P 500 are still negative for the year.

Technology companies have been the biggest beneficiaries of the COVID-19 pandemic and the NASDAQ 100, a proxy for the Technology sector, is more concentrated than the S&P 500 and more tech-centric than the DJIA. The NASDAQ 100, which was created in 1985, tracks the largest non-financial companies listed on the NASDAQ exchange. The FAAMG stocks are still the largest constituents in the NASDAQ 100, but Technology makes up over 55% of the NASDAQ 100 relative to 27.5% for the S&P 500 and 26.9% for the DJIA. It is also important to note that the Dow does not include Amazon, Google, or Facebook.

Over the short term, index calculation methods and composition differences can cause wide performance divergences. However, these divergences come and go based on the performance of the underlying sectors and companies. This year’s divergence has been exacerbated by the COVID-19 pandemic and the outperformance of Technology. As other non-Technology sectors rise in economic importance, we would expect the S&P 500 and DJIA to post more attractive relative returns.

Print PDF > And the Beat Goes On…

¹ Apple’s closing price as of August 18, 2020. Apple has also announced a 4-for-1 split effective August 31, 2020, which will reduce its price to ~$115 a share. Thus, Apple’s weight in the DJIA will decline accordingly.
² UnitedHealth Group’s closing price as of August 18, 2020.

 

The opinions expressed herein are those of Marquette Associates, Inc. (“Marquette”), and are subject to change without notice. This material is not financial advice or an offer to purchase or sell any product. Marquette reserves the right to modify its current investment strategies and techniques based on changing market dynamics or client needs.

U.S. Treasury Borrowings, Receipts, Outlays and Deficit

The U.S. government — including the U.S. Treasury, Federal Reserve, Congress, and executive branch — has stepped up to emergency action in rapid fashion during this coronavirus pandemic. This, along with the heroic efforts of healthcare workers, first responders, and vaccine researchers, is one of the key reasons why our financial markets have enjoyed such a quick recovery, with the S&P 500 currently back to the all-time peaks that it previously reached in February and investment grade and high yield bond spreads now having tightened back to tighter than long-term averages.

Our chart this week looks at how rapidly the U.S. Treasury raised capital by borrowing from the public and deployed that capital via the large-scale Congressional relief packages as well as Fed quantitative easing asset purchases and financial market backstops in the face of declining tax receipts. The green line represents the U.S. Treasury’s monthly borrowings from the public, which skyrocketed in March, peaked in April, and have gradually declined since. Shown in the tan are monthly U.S. Treasury receipts, which as expected gradually declined with the retrenchment in tax revenue due to the recession in which so many ill-fated businesses have shut down and millions of workers have lost their jobs. The darkest slate line shows monthly U.S. Treasury outlays, which rose steeply in March and remain high as these funds continue to be deployed for both fiscal and monetary stimulus measures. Lastly, the blue line shows a rising monthly U.S. Treasury deficit which is not surprising as U.S. Treasury outlays continue to exceed receipts.

While the financial markets have dipped and rebounded to previous highs several quarters quicker than the full circle throughout the 2008 housing crisis, there are still several challenges that lie ahead: the efficacy of the vaccine candidates currently in human trials and the ability to distribute and encourage the adoption of a final approved vaccine in a timely manner; the prospects of the Republican-led Senate and Democrat-led House to agree on a next relief package to help mitigate renter evictions and homeowner foreclosures; the risk of seasonal second or third waves of infections in various regions across the world; and the implementation of re-openings with social distancing that can successfully prevent resurgences until a vaccine is approved and distributed. We continue to expect these challenges to heighten market volatility, which will be further exacerbated by a contentious U.S. presidential election looming less than three months away. Marquette will continue to monitor these issues and provide our perspectives as further developments unfold throughout this pandemic.

Print PDF > U.S. Treasury Borrowings, Receipts, Outlays and Deficit

 

The opinions expressed herein are those of Marquette Associates, Inc. (“Marquette”), and are subject to change without notice. This material is not financial advice or an offer to purchase or sell any product. Marquette reserves the right to modify its current investment strategies and techniques based on changing market dynamics or client needs.

Trump Bypasses Congress with Coronavirus Relief Executive Actions

This past Saturday, August 8th, President Trump issued several executive actions that serve as an emergency COVID-19 aid package. The package includes three memoranda that provide assistance for the jobless, a payroll tax deferral, and an extension of the student loan payment moratorium and an executive order that provides rental and mortgage assistance to mitigate evictions and foreclosures. The executive actions came about because of a stalled Congress as negotiations over the last two weeks fell apart last Friday, August 7th, between the Senate Republicans with their $1 trillion proposal and the House Democrats with their $3.5 trillion proposal.

This newsletter puts these executive actions into context with earlier federal stimulus packages, including an overview of how each action will be implemented and expected economic and financial impacts.

Read > Trump Bypasses Congress with Coronavirus Relief Executive Actions

 

The opinions expressed herein are those of Marquette Associates, Inc. (“Marquette”), and are subject to change without notice. This material is not financial advice or an offer to purchase or sell any product. Marquette reserves the right to modify its current investment strategies and techniques based on changing market dynamics or client needs.

Gold or Glitter?

Gold prices are hitting new highs, closing above the $2,000 per ounce threshold for the first time yesterday, August 4th. It is a familiar scene amid the confluence of economic concern and uncertainty brought on by the spread of COVID-19, negative real interest rates with 10-year Treasury yields just above 0.5%, a weaker U.S. dollar, and the potential for increased inflation following unprecedented monetary stimulus. But with an asset class that only makes headlines at extreme levels, it is important that investors know what they are really getting.

Over time, gold has produced real returns about in line with Treasury Bills (before any storage costs or impact from rolling futures contracts in contango), but with volatility that more closely resembles the S&P 500. And despite being widely considered to hold its value over time, gold is a physical asset whose price is determined by supply and demand, including ongoing mining operations and a large gold jewelry market in China and India. But what is perhaps most surprising is that gold is actually a poor inflation hedge. Over the last 50 years, the correlation between gold and core inflation has ranged from -0.55 to +0.75, with an average of 0.05.¹ Over time, equities have been the best option for outperforming inflation.¹ Dating back to World War II, gold has only outperformed equities in the short windows when inflation has been categorically greater than 6% (the last of which ended in 1982), and even then only half the time.¹ Thus despite the headlines that gold receives when its price is notably rising, it is not a particularly attractive allocation for long-term investment portfolios.

Print PDF > Gold or Glitter?

¹ Goldman Sachs Investment Strategy Group

 

The opinions expressed herein are those of Marquette Associates, Inc. (“Marquette”), and are subject to change without notice. This material is not financial advice or an offer to purchase or sell any product. Marquette reserves the right to modify its current investment strategies and techniques based on changing market dynamics or client needs.